Pension reform set to unlock Turkey's fund management industry

ISTANBUL, March 6 (Reuters) - Turkey could see half amillion new private pension contributors this year thanks tochanges in regulation, boosting a nascent fund managementindustry and luring global portfolios.

The country of 75 million has seen an unprecedented rise inprosperity over the past decade, with per capita income almosttripling in nominal terms, but its savings rate is low, withmany Turks still scarred by the hyperinflation of the mid-1990s.

That reluctance to save, combined with a closed systemdominated by bank-owned fund managers and insurers, has meantTurkey's pension industry has remained small and largelyimpenetrable to foreign asset management firms.

But since the start of the year, the Turkish state has beenmaking limited contributions to private pension schemes in a bidto boost domestic saving, leading to a sharp increase in thenumbers of people participating.

Almost 120,000 people joined private pension schemes inJanuary alone, a four-fold increase from a year earlier.

The government is also considering legislation to encouragepension funds, most of them units of major banks, to invest 30percent of their assets with outside fund managers rather thanrelying on in-house expertise at their parent bank.

The changes have already caught the eye of foreign assetmanagement firms.

Helsinki-based Taaleritehdas East Asset Management, whichmanages around 3 billion euros ($3.9 bln), set up a Turkish unit- Taaleri Portfoy Yonetimi AS - to tap the growth potentialresulting from the expected liberalisation.

"It's crucial to enter the business a little early, gain aplace in the sector and catch the trend. We have an advantage aswe are one of the first movers," Ismail Erdem, head of TaaleriPortfoy Yonetimi in Istanbul, said in a telephone interview.

IN ITS INFANCY

Some 500,000 contributors are expected to join privatepension plans this year, industry experts say, boosting it to a30 billion lira ($17 billion) industry with around 3.7 millioncontributors, from around 21 billion lira now.

By comparison, Turkey's mutual fund industry has $32.9billion of total assets under management as of the end ofJanuary, managed by some 35 portfolio management firms.

The mutual fund to gross domestic product (GDP) ratio isaround 2 percent in Turkey, one of the lowest among emergingmarkets peers. The government hopes that is about to change,with pension funds a major driver of the growth.

"The Turkish pension market is an infant industry, just 10years old and growing at a great pace," said Mehmet Bostan, thehead of the Pension Monitoring Centre (EGM) and Chief ExecutiveOfficer of Vakif Emeklilik, a pension company.

"The average growth rate of total funds in the systembetween 2005 and 2012 was more than 85 percent. It's expected togrow further with the new regulations, especially the statecontributions. This market has a huge potential," he said.

Savings fell to historic lows of 12 percent of nationaloutput in 2010 from around 17 percent in 2002-2008, according toWorld Bank data, and boosting domestic saving has become a majorpolicy goal for the government, with pensions one of its tools.

FOREIGN DEALS

It is hoped the regulatory changes will draw in newcomers.

"Portfolio management firms will be on the radar of foreigncompanies. I think they are more likely to buy stakes in Turkishportfolio managers than start from scratch," said Gur Cagdas,head of Turkey's Institutional Investor Managers Association.

"Foreign companies could be more interested in portfoliomanagement companies owned by banks because of theirwell-established distribution channels," Cagdas said.

He expected the draft law on the use of outside fundmanagers to be passed later this year as part of wider reformsto the pension industry. Fund management charges will also bereduced in a further bid to entice savers.

Deputy Prime Minister Ali Babacan said last month that thestate had set aside 1.25 billion lira in funding for the pensionsystem and further transfers could be made if the need arose.

"We took important steps to reduce costs and fees, from nowon it will be important for the companies to gain from demand,"Babacan said.

Turkey's existing private pension laws were approved byparliament in 2001 in what was then seen as a major step toreducing the burden on state social security and improvingwelfare levels.

The system went into effect in October 2003, with just sixpension companies at the time. There are now 17 private pensioncompanies in Turkey.($1 = 0.7702 euros)($1 = 1.7973 Turkish liras)